This topic explains total return swaps (TRS), also known as total rate of return swaps, and then describes how to use the associated template in SWPM to price a TRS.
Note: This section provides a general overview of the SWPM TRS template. For detailed information regarding the TRS model and inputs used, see Single-Stock Total Return Swap, Index Total Return Swap, and Bond Total Return Swap.
A TRS, or total rate of return swap, is a bilateral financial contract in which one party (TR payer) pays the total positive return of a bond, loan, or other financial obligation (reference asset), while the other party (TR receiver) pays a fixed or floating rate payment plus any negative total returns on the reference asset.
The TRS then allows one party to derive the economic benefit of owning an asset without putting that asset on its balance sheet, and allows the other (which does retain that asset on its balance sheet) to buy protection against loss in its value. A TRS has an asset leg and a financing leg. In SWPM, the asset must be a bond or equity composite index, denominated in any currency. You can also import your own custom index. The financing leg is similar to a conventional floating Libor swap leg and is called a financing leg because a TRS looks like the synthetic secured financing of a purchase of the asset. Essentially, the total economic performance of the asset is exchanged for a stream of LIBOR plus spread payments.
You can use the shortcut SWPM -TRS <Go> to access the TRS template from the command line, or you can click the
Products toolbar button to choose a template from a menu.
• For more information about shortcuts, see Shortcuts.
• For information about how to load templates from the toolbar, see Choosing a Template.
SWPM's TRS template is organized into eight tabs that allow you to set up and analyze the swap. You can structure and value your swap on the Main tab of the template, which is divided into four sections. You can input details of the swap in the Leg 1,
Leg 2, and curve data sections, then evaluate the swap in the valuation section.
• Control Area: Allows you to navigate between tabs, analyze deals, set up scenarios, manage risk, generate trade tickets,
and configure your default settings. For more information, see Control Area.
• Asset Leg: Allows you to configure your settings for the asset leg of the deal. You can specify the asset, including custom
indexes created in the Custom Index Time Series (CIXI) function, and you can enter, for example, the market side, notional units or notional amount, currency, effective date, and maturity for the deal. At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the asset leg appear.
— For information about a field, position your cursor over it or see TRS Tabs. — For more information about CIXI, see CIXI <Help>.
— For information about how to specify the percentage of dividends included in total return calculations, see Configuring
Leg Details.
• Financing Leg: Allows you to configure your settings for the financing leg of the deal. You can enter the market side, the
notional amount (SWPM supports asymmetric notionals), the index used to calculate the floating rate, along with the reset frequency, pay frequency, spread, and other details. At the bottom of the section, the market value, accrued interest since the last leg cashflow date, premium, and DV01 for the financing leg appear.
— For information about a field, position your cursor over it or see TRS Tabs. — For information about scaling reset rates, see Scaling Reset Rates.
— For information about editing leg characteristics such as date generation, amortization, and payoff information, see
Configuring Leg Details.
— For information about overriding the initial and/or historical asset/index values, see Managing Resets.
• Curve Data: Allows you to update the curves that SWPM uses to discount cashflows and project forward pricing when
calculating the Market Value of the swap. SWPM allows you to choose a forward curve for each leg of the deal, so you have flexibility when projecting forward values for the asset and financing legs. SWPM calculates the market value using the selected curve at the market close of the day indicated in the Curve Date field. The Valuation date is the date at which future cashflows are discounted.
Note: By default, SWPM prices swaps as of today, i.e., the default curve date is the current date and the valuation date is T+2. To price swaps as of a historical date, you must backdate both the Curve Date and Valuation fields. For example, to
mark to market at quarter's end, you can enter the historical quarter-end date in both the Curve Date and Valuation fields. For more information, see Backdating the Valuation.
— For information about a field, position your cursor over it or see Definitions.
— For information about how to update the curves that appear by default, see Setting a Source Curve.
— For information about how to visualize, customize, and apply shifts to the selected curve, see Analyzing Curves. • Valuation: Allows you to choose the calculation method: projection based259 or accrual based260. Once you select the
calculation method, SWPM calculates the market value of the deal (the sum of the present values of the receive leg minus the sum of the present values of the pay leg) and premium of the deal.
— For information about a field, position your cursor over it or see TRS Tabs. — For information about total return calculations, see Total Return Swap.
You can further analyze total return swaps by selecting another tab from the control area. Additionally, you can save your deal by selecting Actions > Save from the toolbar. Once you save the deal, you can access it from other Bloomberg functions or through Bloomberg's API by entering the deal number followed by the <CORP> key. For example, this allows you to download the cashflow schedule for an individual leg to Microsoft® Excel with Bloomberg's API.
• For information about the other tabs that appear on the template, see TRS Tabs.
• For detailed information about the models and inputs used, see Single-Stock Total Return Swap, Index Total Return Swap,
andBond Total Return Swap.
• For more information about saving deals, see Saving Deals.
• For examples of using the template to price a plain vanilla swap, see Example: Solving for Spread and Example: Solving for
Price.
• For information about Bloomberg's API, see DAPI <Help>.